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Executives

Pat Collawn - Chief Executive Officer, President and Director

Chuck Eldred - Chief Financial Officer and Executive Vice President

Gina Jacobi - Corporate Communications

Analysts

Paul Fremont - Jefferies & Company, Inc.

Brian Russo - Ladenburg Thalmann & Co. Inc.

Michael Bolte - Wells Fargo Securities, LLC

Matt Fallon

Ali Agha - SunTrust Robinson Humphrey, Inc.

Chris Shelton -

PNM Resources (PNM) Q2 2011 Earnings Call August 5, 2011 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the PNM Resources Second Quarter Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn it over to your host, Ms. Gina Jacobi, the Director of Investor Relations. Ma'am, you may begin.

Gina Jacobi

Well, thank you, everyone, for joining us this morning for a discussion of the company's second quarter 2011 earnings. Please note that the presentation and accompanying materials for this conference call and supporting documents are available on the PNM Resources website at www.pnmresources.com. Joining me today are PNM Resources' CEO, Pat Collawn; and Chuck Eldred, our Chief Financial Officer; as well as several other members of our executive management team.

Before I turn the call over to Pat, I need to remind you that some of the information provided this morning should be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all of the forward-looking statements are based upon current expectations and estimates and that PNM Resources assumes no obligation to update the information.

For a detailed discussion of factors affecting PNM Resources' results, please refer to our current and future annual reports on Form 10-K and the quarterly reports on Form 10-Q, as well as other current and future reports on Form 8-K filed with the SEC.

And with that, I'll turn the call over to Pat.

Pat Collawn

Thank you, Gina. And good morning, everyone. Thank you for taking the time to join us on what looks at a very volatile morning so far on Wall Street. Earlier today, we released our second quarter results and reported ongoing earnings of $0.20 per diluted share, which is just shy of last year's mark of $0.21. Our GAAP results reflect the impact of regulatory disallowances based on what we know about the PRC's oral decision in PNM's rate case. Chuck will discuss this issue in more detail.

Both utilities, particularly PN -- TNMP, posted better ongoing results this year compared with the same period in 2010. First Choice Power had strong sales volume growth for the quarter. Results in Optim Energy were affected by the low price energy market in ERCOT, which has limited performance for all generators including Optim. This morning, we are also affirming our ongoing earnings guidance range for 2011. If you turn to Slide 5, I want to touch on our retail load at both PNM and TNMP. Both utilities had moderate retail load growth for the quarter, and while we've been cautious to say it in previous quarters, I think we can now safely say that we are in a load growth trend but particularly for PNM.

For PNM, the 1.4% weather-normalized load growth this quarter compared with 2010 represents the seventh consecutive quarter of load growth we've had here at PNM. TNMP had load growth of 1.5% this quarter compared with last year and that continues TNMP's trend of producing steady, moderate growth. You'll remember that the economic conditions did not impact TNMP as severely as they did PNM. We also continue to have load -- or customer growth at both utilities although modest, 0.5% at PNM and 0.8% at TNMP.

I want to turn to Slide 6 for a moment on the regulatory discussion. As you all know by now, last Thursday, the New Mexico Public Regulation Commission orally approved modification to our original stipulated rate increase proposal, and we are awaiting a written order. We believe the stipulation was a fair and reasonable compromise and the commission's decisions last week was less than what we had hoped. Based on conversations during last week's open meeting, the PRC has granted us rate relief of $72 million. The commission's decision eliminates the phase-in approach, meaning if PNM and the stipulation signatories do not oppose the order, the full $72 million rate increase would go into effect almost immediately.

Most of you have already recognized the commission's order has incremental benefits for 2011 without the phase-in.

The order as discussed last week would also move up the stay-out period to an earlier date as of 2013. If this is correct, moving up that stay-out period would give PNM the opportunities to file for updated rates that would capture most of what we would recover -- would have recovered in the rider. So we're still awaiting the written order, and once we get it, we'll review it carefully. We are disappointed in how the regulatory process unfolded and that the commission modified the stipulation on the $85 million reached with key parties and supported by the hearing examiner and the commission's own general counsel.

As I said, though, we will accept the written order in light of our unrelenting focus to earn our allowed regulated returns, and we will take the appropriate steps to ensure we reach those goals. Moving forward, we will continue to synchronize our PNM expenses with our revenues. For TNMP, that utility operates in a constructive regulatory framework, and its earnings reflect that it is earning its allowed ROE year-to-date.

PNM has also come to a resolution of its advanced metering systems case. On July 8, the Public Utilities Commission of Texas approved the stipulations that allows the utility to recover $113 million over 12 years. The AMS rider will be in place starting August 11. And as we have previously reported, the advanced metering system will increase rate base and will result in an incremental return of $0.01 per share annually.

We turn to our competitive business on Slide 6. As expected, performance for First Choice Power and Optim Energy were lower in 2011 than 2010. It is no surprise that margins continue to compress in a competitive retail energy environment, and the pressure caused by low energy prices continues to impact results for Optim Energy. For First Choice Power, the company continues to successfully execute its strategy to grow its Commercial Customer segment. Additionally, First Choice has developed and deployed new programs to expand its residential and commercial offerings, which have resulted in a more loyal customer base. On the Optim side, like most if not all generators in Texas, Optim Energy continues to be impacted in its performance by the low-priced energy market. Optim is doing an outstanding job mitigating that situation with good plant performance at Twin Oaks and Cogen, and by their using alternative fuel at Twin Oaks. Twin Oaks and Altura are running at or better than expectations. And at Cogen, on June 14, the plant celebrated 4 years without a lost-time accident, which is a testament to their focus on safety and operations. Has been the story for the past several quarters, Optim Energy continues to focus on cost-control, managing its liquidity and its cash flow.

That concludes my summary. I'll turn it over to Chuck for a more detailed discussion on financial results and guidance.

Chuck Eldred

Thank you, Pat, and good morning to everyone. As Pat reported, ongoing earnings were $0.20 for the second quarter, down $0.01 from last year. However, a breakdown of our EPS by segment shows earnings at our regulated businesses were up a total of $0.06 from last year, demonstrating the continued progress we are making towards earning our allowed ROE. Total earnings at our competitive businesses, which include First Choice and Optim, were down $0.06. However, this trend has been fully expected given the low power price environment in Texas and the expiration of the Twin Oaks contract in December of last year, both of which have been factored into the guidance we issued earlier this year. Despite the expected drop in competitive earnings, we remain pleased with First Choice Power's performance, which remains very strong during the second quarter.

And turning now to the individual business segments on Slide 10, and starting with PNM. In the second quarter, New Mexico Utility's ongoing earnings were up $0.02 from last year. On the positive side, outage costs were down $0.04 from last year, reflecting a reduction in the number of planned outage days. Realized gains from the Palo Verde Nuclear Decommissioning Trust also added $0.04. Another positive was weather-normalized load growth of 1.4%, which added another $0.01 to earnings. As you recall, we had expected PNM's annual load to increase 1% to 2%, and the 1.8% load growth experienced during the first half of this year is in line with our original expectations.

Negative factors affecting PNM's performance this quarter included the expiration of the Palo Verde 3 toll on December 31 of last year. As you know, this unfavorable variance had been expected and is currently reflected in our guidance for the year. For the quarter, the toll's expiration reduced earnings by $0.07.

Now turning to TNMP. At TNMP, earnings were up $0.04. The implementation of new transmission rates last year along with new rates that were put in place in February of this year, added $0.03. Warmer weather contributed an additional cent to earnings as cooling-degree days in TNMP's territory were up over 11% compared with last year.

Now turning to Slide 11. As I mentioned earlier, earnings at our competitive businesses were lower than last year, but the decline had been fully expected. Starting with First Choice Power, we continue to be pleased with the company's performance. For the quarter, commercial sales were up 32% from last year reflecting First Choice's continued efforts to diversify its customer base. Because of the strong commercial growth experienced year-to-date, First Choice Power now expects its commercial sales volumes for 2011 to increase 20% to 25% over last year. The company's second quarter EBITDA of $14.5 million was down about $3 million from last year. However, the decline had been fully expected. First Choice total gross margin was down slightly year-over-year as the expected reduction in unit margins was almost entirely offset by an increase in customer usage and warmer weather.

Compared with last year, First Choice's O&M in the second quarter was up $2.6 million, primarily reflecting higher advertisement and marketing expenses, the cost of new local offices and the implementation of First Choice's prepaid program. On the other hand, bad debt expense continues to decline. During the second quarter, bad debt was 4.7% of revenue, down 5.1% last year.

And moving on to Optim Energy. Optim generated about $4 million of EBITDA in the second quarter, down about $14 million from last year. As you know, we had been expecting the decline of this magnitude given the expiration of the above-market sales contracts at Twin Oaks.

In the second quarter, the roll-off of the contract reduced Optim's EBITDA by about $9 million. Another unfavorable driver was the timing of Twin Oak's annual maintenance outage, which reduced EBITDA by about $6 million. The outage was completed as scheduled and came in under budget.

However, the number of the planned outages days were higher than last year as the outage was more comprehensive. On the positive side, slightly higher power prices in ERCOT during the second quarter helped to offset the negative impact of Twin Oaks' contract expiration and the plant's outage.

Before turning to Slide 12, let me address the $0.30 regulatory disallowance that is reflected in our second-quarter GAAP losses. Comments made during the commission's opening meeting last Thursday indicate that the revenue requirement associated with prior-debt refinancings was one of the items excluded by the commission in arriving at the $72 million rate increase. As a result, in accordance with GAAP, $30 million of prior-debt refinancing costs were written off. While the hearing examiner agreed that the stipulated $85 million rate increase in total was just and reasonable, she did state that the company did not demonstrate a net benefit to customers from the refinancing cost and would exclude them in the litigated cost of service proceedings.

The company disagrees with the hearing examiner's conclusion because the customers have and continue to benefit from PNM's refinancing of higher-cost debt. In fact, a portion of these costs were approved by the commission for recovery in prior litigated rate cases. PNM expects to include these costs in its next rate case filing. If they are approved, the regulatory asset would be restored to our balance sheet.

In addition, another $15 million write-off was recorded for amounts that had been fully anticipated. As part of this stipulation, the company agreed to forgo recovery of $10 million of the under-collection in PNM's fuel clause balancing account. Additionally, the company had agreed not to seek recovery of external rate case-related cost of $3.8 million and the $1.25 million contribution to the Good Neighbor Fund. Keep in mind these charges do not impact our ongoing results.

Now let's turn to the impact of the oral decision it's expected to have on ongoing earnings. Assuming a $17 million increase and implementation in new rates in mid-August, we expect to earn an incremental $0.20 over last year. And in 2012, we expect to add another $0.27 to earnings, reflecting the full year impact of the $72 million rate increase.

Although we're disappointed in the New Mexico rate case process, our regulated business have certainly made a lot of progress over the last couple of years. In 2009, PNM's regulated rate-base return was 3.7%. This year, we expect to earn approximately 7.5%, and next year, our return-on-rate base will be even higher reflecting the full year impact of the $72 million rate relief.

Lastly, I want to assure you that we have not lost our sight of the ultimate goal, which is to earn our allowed return, and we will not stray from this path.

Now moving on to Slide 13. As Pat mentioned earlier, we are affirming our original earnings guidance for the year. We still expect consolidated ongoing earnings to range between $0.80 and $0.92, with the regulated earnings coming in between $0.89 and $0.96, and our unregulated businesses contributing between $0.06 and $0.16. I do want to add one caveat. Our guidance assumes a $72 million rate increase and implementation of the new rates in mid-August. We are also maintaining our original guidance range of $0.62 to $0.67 for PNM Electric despite the PRC's denial of inner rate relief and the delay in the rate case ruling. We remain confident that PNM can deliver earnings within a range of -- for a number of reasons. With a mid-August implementation, we expect an incremental $0.04 to PNM's earnings this year. Additionally, as Pat mentioned earlier, we plan to continue to synchronize our expenses with our revenues.

The company currently has more than 40 process-improvement projects underway to increase efficiencies throughout the organization. The focus of these projects is wide-ranging and incorporates all functional areas within PNM Resources. Currently, we expect these projects will create a number of cost synergies that will carry forward into next year. We plan to provide you with an update on our progress on or before we issue 2012 earnings guidance.

Also unchanged from last quarter are our unregulated EBITDA guidance ranges and our outlook for cash earnings.

Before I turn it back to Pat, I want to briefly discuss some internal changes that we'll be making in our Investor Relations department. As we've mentioned many times in the past, we are continually looking for ways to streamline our operations and control our cost. Furthermore, we're actively engaged in developing our employees and increasing their breadth of experience. As a result, effective August 15, Gina Jacobi, our current director of IR, will be moving to Enterprise Risk Management. And Lisa Eden, currently our Assistant Treasurer, will be adding to her current duties by taking on the role formerly held by Gina. Lisa is currently responsible for communicating with rating agencies and our relationship banks, so adding equity investors and analysts to the mix is a natural fit.

If you have any questions, feel free to call Gina through the 15th. Thereafter, Lisa Eden will be your primary IR contact, and we've included all contact information in the appendix. And that, I'll turn it back over to Pat for her concluding remarks.

Pat Collawn

Thank you, Chuck. At the end of the first quarter call, we said we would have much more to report than we did back in May regarding our key strategic goals and the checklist on Page 14. As far as our goal of earning our regulated return on equity, we continue to make significant strides towards achieving solid returns. As Chuck mentioned, the rate base returned for PNM has doubled from 2009 to 2011. And at TNMP, from 2009 to 2011, our regulated rate-on-return has increased more than 80%. I talked at length about PNM's rate case and updated you on the TNMP-AMS docket. Regarding PNM's FERC rates, those went into effect on June 1, subject to refund. Both PNM and TNMP remain on track for finishing the year with good operational results while controlling costs. On the competitive side of our business, First Choice continues to have strong and steady performance. And Optim Energy remains poised to capture opportunities that arise in the market.

Before we go to questions and answers, I want to talk about 2 things. First I'd like to comment a little more on our competitive businesses. We have continually said that one of our goals is to maximize the value of our competitive businesses and have recently said that we are looking at strategic alternatives for those businesses. Any decisions regarding our competitive businesses will be made in order to maximize shareholder value. And although there have been a lot of rumors in the market about possible strategic alternatives, we have a strict policy of not commenting on market rumors. Therefore, we won't discuss that issue any further.

And finally, while we are disappointed that the stipulation was not approved, we are moving forward with what we can control and remain relentlessly focused on earning our allowed return on equities. With that, I'll turn the call back over to our operator to start the question-and-answer portion.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Brian Russo from Ladenburg Thalmann.

Brian Russo - Ladenburg Thalmann & Co. Inc.

Did I interpret your comments correctly from earlier, that load growth is on track with your expectations and your cost-cutting efforts are also on track with your expectations? Both were key components of earning near your allowed ROE?

Pat Collawn

Yes, Brian, and both of those are on track. We said our load growth at PNM would be between 1% and 2%, and we're at about 1.8% through the first half of the year. We actually set a new peak if we wouldn't have called our demand response here at PNM, but since we were able to call that, we didn't set a peak and our costs remained firmly under control.

Brian Russo - Ladenburg Thalmann & Co. Inc.

Can you quantify kind of the cost of that run rate you guys are assuming or are targeting?

Chuck Eldred

Brian, at this point, as I mentioned in my notes, that we have a number of processes underway that would establish some cost efficiencies in the organization that would be permanent and sustainable going forward. But at this stage, I'd rather just refrain from any details until we get a little further along with those projects and the results of those. And then hopefully later this year if not the latest during the 2012 guidance, we'll give you more clarity around that and some numbers that would reflect the results of that.

Brian Russo - Ladenburg Thalmann & Co. Inc.

Okay, and just to clarify, the second quarter adjusted earnings, does that include or exclude Optim's loss?

Chuck Eldred

No, it includes Optim's loss. Keep in mind, we're continually -- as we stay involved in the competitive business, we include Optim's losses within our guidance range.

Brian Russo - Ladenburg Thalmann & Co. Inc.

Okay, and also, I know the final order from the commission is still pending, but I'm getting the sense that you guys are almost -- you're going to agree to it, I guess? I mean, I guess that's one option that you have. But what are the other options available to you?

Pat Collawn

We have 3 options, Brian, and we haven't decided until we see the order. One is to accept or at least not oppose the order. The other is to ask for rehearing on the order or specific parts of the order. And then the other one is to not accept it and move to litigation. And until we see the order, and remember there are more signatories to this order, and we all have to agree. So we need to be able to see the order, examine it and talk with the signatories before we make a decision.

Brian Russo - Ladenburg Thalmann & Co. Inc.

Okay, and then lastly, I'm surprised your First Choice Power results or expectations weren't better or increased given what we've seen in Texas load demand, not only in June but in July and August to date. Can you comment on how First Choice Power is performing?

Pat Collawn

Yes, and actually, Brian, Brian Hayduk is here from First Choice Power. So I'll let him give you a little color commentary on the past. We obviously won't comment on July. So...

Brian Hayduk

Yes, Brian, and we obviously talked about the performance year-to-date, and I think it's just too soon. I mean, coming into a year like this, you're not obviously through the summer yet. Our thoughts were just not to change guidance based on the first 6 months. It's really as simple as that. Obviously, we're performing well, but there's a ways to go.

Brian Russo - Ladenburg Thalmann & Co. Inc.

But I guess it'd probably be a bias to the higher end of that range. Is that safe to assume?

Chuck Eldred

Yes, just we obviously can go back and look at the original guidance range, and given year-to-date performance and strong performance, we'd continue to look to be in the higher end of the range. But as Brian pointed out, we still got 6 months more to go for the year. So that's kind of where we are now.

Operator

Our next question comes from Ali Agha from SunTrust Inc.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Pat and Chuck, I just wanted to be clear on the way you're positioning the commission's order. On the one hand, I hear you saying that obviously you haven't yet made a decision on how to proceed, waiting for the final order to come out. But if I'm also hearing you right, the guidance that you've given us for '11, specifically, and the number you showed for '12, that assumes that you accept the order as is and the numbers flow starting mid-August. Is that correct?

Chuck Eldred

Yes, and then keep in mind that the accounting treatment, the GAAP information I reported, reflects the best available information. And we talked about the oral decision. The commission did vote on the $72 million. So we're waiting for the order itself to take a look and review the written piece of this. But certainly the $72 million is a reasonable assumption to make, given the fact that they voted on that during the hearing last week. That's why we're comfortable and one, for the accounting treatment to reflect that, and two, to make that assumption at this point in our projection.

Pat Collawn

It's really the best information we have at the time, and until we see it and decide whether or not accept it, we're going to reflect that $72 million in the guidance.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Also related to that, Chuck, if I heard you right, you're saying that because it's not a step-up, or a 2-step deal, I think what you're saying is there's an extra $0.04 of earnings you're picking up in '11 than you would have in your original 2-step assumption. If that's the case, why not raise your guidance for '11? What's offsetting that?

Chuck Eldred

Yes, Ali, if you think about -- when we said guidance and you think about for the entire year, we expected roughly around, and then I'll give a little detail, around $0.23. But when you look at the delays and the inner rate relief and other factors that caused during the process of proceedings for the rate relief itself, we essentially lost around $0.07. And so when you go back and make the adjustments and the projections going forward and assume that this is no longer a 2-phase approach, but it's $72 million effective on August 15, we pick up another $0.04. But it doesn't fully recover all the cost that we had essentially lost from the original guidance this year.

Ali Agha - SunTrust Robinson Humphrey, Inc.

All right, got it. Also in the decision-making, as you're waiting for the final order, I would imagine, is one of the key, perhaps the key element for you the stay-out provision? Is that going to be the main determinant of whether you accept it or not accept it? Is that a fair way to think about it?

Pat Collawn

I think that's one of the things that we will look at when we get the order. We will obviously weigh the litigation risk because you can't put new rates into effect if you're litigating, so we'll weigh the litigation risk. We'll weigh what our other signatories think. We will look at the stay-out period. We will look at things like the environmental reopener to make sure it is there. So there's a whole number of things that we need to see if they're there or not.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Okay. Another question, the realized gains that you picked up for the Nuclear Decommissioning Trust, was that factored into your guidance for the year? And remind us, how -- you're cutting off an event. Should we be thinking of that?

Chuck Eldred

No, this is -- we don't budget for any realized gains in nuclear decommissioning. It's just the fact that the way the portfolio -- it's about $168 million the way it's managed, and it's balanced between equity and fixed-income securities. If, in fact, those -- that portfolio is rebalanced, or there's a change in this case, of a portfolio manager, there's some readjusting on the securities that are currently outstanding. So we were fortunate to hit the market at a good time, and there were some securities sold. And we don't normally budget for that, but it certainly has helped hold us in -- within the guidance range of this year.

Pat Collawn

And some years we've had got losses, and we've had those in earnings. And we've made up for the losses by other things. So...

Ali Agha - SunTrust Robinson Humphrey, Inc.

Understood. Last question, Pat, I heard you on your comment on the unregulated businesses and the strategic thinking that you're going through. Could you at least give us a sense of -- is this something that we should have a definitive answer on by the end of this year? What's the time frame that you're looking at for making a decision there?

Chuck Eldred

Ali, you asked that question the last time, didn't you?

Pat Collawn

He did.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Well, you guys are becoming a little more proactive in talking about it. I figured, take it another level.

Chuck Eldred

Yes, well, we understand your position.

Pat Collawn

When we know you'll know.

Chuck Eldred

Well, we don't want to comment as Pat pointed out. And I think that's the right answer.

Operator

[Operator Instructions] Our next question comes from Paul Fremont from Jefferies & Co.

Paul Fremont - Jefferies & Company, Inc.

First question is just a quick clarification. When you say that the third option is not to accept and move to litigation, I'm assuming that's the litigated track of the rate case and not to a court challenge? Or which of those 2 is it?

Pat Collawn

It would be to the litigated track on the rate case, to litigate that -- the original $165 million.

Paul Fremont - Jefferies & Company, Inc.

And then just following up on Ali's question on the Nuclear Decommissioning Trust. I think you've recorded through the first half about $11.7 million contribution. How much of that is sort of just the earnings power on the portfolio and how much of that -- I guess, Chuck, you referred to some accounting adjustment in terms of changing portfolio manager. How much of that is sort of just not non sort of nonrecurring?

Chuck Eldred

Well, we've -- as you mentioned, it's probably about -- it's $0.04, as I said, for this last quarter and we had some for the first quarter as well. So it's essentially non-reoccurring. We don't budget for that. We don't expect that to occur. It's just how the portfolio is managed and the way the accounting treatment requires for realized gains to go through the income statement. So it just -- as it turns out this year, there were some changes in the portfolio manager. And certainly the market during the first 6 months reflected some rebalancing of the trust fund, and it's reflected in the earnings. But it's not an ongoing, and that's something that we typically reflect. And as Pat pointed out, there have been years when we took losses in the account as well. So it's just the way that the income and the accounting treatment is handled.

Paul Fremont - Jefferies & Company, Inc.

And then with respect to guidance, based on your comment earlier that you were also looking to see what potential cost reduction was possible in your future budget, should we assume that the guidance would not come shortly after the issuance of a final rate order? Would this be more likely in conjunction with the third quarter conference call, end of year, beginning of next year?

Pat Collawn

Yes, Paul, you're talking about 2012 guidance?

Paul Fremont - Jefferies & Company, Inc.

Yes.

Pat Collawn

Yes, we typically don't give our 2012 guidance until the February time period. So if we have anything before then or if we change our guidance schedule, we would do that at the end of the year, but typically, we would give that in February.

Paul Fremont - Jefferies & Company, Inc.

And the last question I have is, when I think about the rate order, is there any impact in terms of plant in service that might be used to calculate federal tax benefits under some of the tax legislation that was adopted last year?

Chuck Eldred

No, not that I'm aware of. We'll just follow up and be sure. But I'm not aware of anything in particular.

Operator

Our next question comes from Matt Fallon from Talon Capital.

Matt Fallon

Just wondering on the San Juan BART update and that capital that may be spent. What's the timing on that capital? And what have you included in your current CapEx plan?

Pat Collawn

Yes. Two things. We should know today. Today is the day, the deadline for the Environmental Protection Agency to issue its FIP. So we'll know today. Right now, we do not have anything included that's in that capital forecast in the appendix because we just don't know what the EPA will end up doing. If they give us a FIP that requires a selected catalytic reduction, which is the more expensive capital, we believe, as opposed to the 3 years in the original filing, it could be up to a 5-year compliance period. So that capital would be spent over a 5-year period. Obviously, the capital gets spent, and the first part of that is less because you're basically working on design and engineering. But that's one of the reasons why when we look at the radar, one of the things that's going to be important is the environmental out-piece of it. And if you look at our balance sheet and our cap structure, we're very much able to borrow the money we're going to need to put in, whether it's FCRs or SNCRs. But as soon as we know from the EPA, we'll issue a press release.

Operator

Our next question comes from Michael Bolte with Wells Fargo.

Michael Bolte - Wells Fargo Securities, LLC

I also have a question on the order. If you ask for a rehearing on a specific aspect of the order, is the review specifically limited to changes to that item? For example, so if you go in and on one of the items that brought it down from $85 million to $72 million and win on that, can they then go back and try to change something else to basically net back down at $72 million?

Pat Collawn

It's a little bit of a gray area. Theoretically, if we would just go in to ask for a rehearing on one, it should do that. But that does give somebody the opportunity to reopen Pandora's box. So that's part of the risk that we will look at.

Operator

And our next question comes from Chris Shelton with Millennium.

Chris Shelton -

Just wanted to follow up on a comment on just -- obviously, the other signatories need to also sign on to the revised order. Is -- was there anything from talking to them or anything you'd perceive as that they would push back on based on what we heard at the meeting last week, I guess?

Pat Collawn

I don't want to speak for them, but I will say that was a -- I think the silver linings out of this is that our relationship with the staff and the attorney general and NMIEC and the other signatories is excellent, and it's as strong as I have seen it, which allowed us to get to that agreement that we thought was very fair and balanced. So they haven't seen an order. We haven't heard anything from them. They could come up with something, but that's -- it's an excellent working relationship the company has with them.

Chris Shelton -

Okay, so there will be obviously other -- well, you'll be in discussions with them after the final order comes up, obviously?

Pat Collawn

Yes, absolutely. And very quickly we expect to come to resolution.

Chris Shelton -

Okay, and then as far as the stay-out period, what is your expectation, I guess, on what that stay-out period will end up being?

Pat Collawn

What we believe, based on what we heard, was that the stay-out period would be moved until mid-2013.

Chris Shelton -

Okay, so that would mean you could file a case in anticipation of rates going into effect mid-'13?

Pat Collawn

Correct.

Chris Shelton -

And that would be, I guess, what we should anticipate you doing I suppose, no reason to delay?

Pat Collawn

I wouldn't think there would be any reason to delay.

Operator

And now I'd like to turn it back over to the speakers for their final comments.

Pat Collawn

Well, again, thank you very much, everyone, for joining us this morning. We are watching the market as I'm sure you're all, and it remains volatile. As soon as we have the final order and have it evaluated and talk with the signatories, we will get a release out to everyone with our decision and the same on the EPA. We appreciate you joining us as we continue to focus on earning our allowed returns on our regulated businesses and making sure that our competitive businesses maximize the value for shareholders. We'll talk to you all next quarter, if not before.

Operator

Thank you. Ladies and gentlemen, this does conclude your call for today. You may now all disconnect. Thank you very much, and have a wonderful day.

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